Motorola Gets a Debt Downgrade

Moody's Investors Service says that it has revised Motorola's outlook to negative from stable and affirmed Motorola's Baa1 rating. The outlook revision is driven by continued setbacks in the handset business. The company recently announced greater than expected declines in the mobile handset business in the second quarter and estimated handset shipments to be 35 to 36 million units, down significantly from previous periods. Motorola also announced it no longer expects the handset business to be profitable for 2007.

Moody's says that the negative outlook reflects the lowered expectations for Motorola's handset business and uncertainty over when the segment will return to profitability. While the high levels of cash and the cash flow from Motorola's diverse group of businesses should provide the financial resources to withstand a disruption in its handset business, the length of the current setback and the magnitude raise the possibility that a lower rating is more appropriate for the company.

Moody's continues to believe Motorola is a formidable player in the mobile handset business despite recent missteps. The handset industry is expected to grow at double digit levels, but it is an intensely competitive industry and market share for any one player can swing significantly from quarter to quarter.

The ratings could be lowered if the handset business does not show signs of improvement by early 2008 or overall performance continues to deteriorate. The ratings could also be negatively impacted if cash and short term investments fall below debt levels whether from share buybacks or from funding operating shortfalls.

Moody's  says the outlook could return to stable if the company is able to show sustained improvement in profitability in the handset business."

Posted to the site on 16th July 2007